Turning the Tables on Assessors and Taxing Jurisdictions Who Bring Recent Sale and Other Reverse Appeals Kevin M. Clyne, Esq. Herman Katz Cangemi & Clyne, LLP Melville, NY kclyne@hkcclaw.com Peter H. Schnore, CMI, Esq. Babst, Calland, Clements & Zomnir, PC Pittsburgh, PA pschnore@babstcalland.com Bruce J. Stavitsky, Esq. Stavitsky & Associates LLC Fairfield, NJ bruce@proptaxappeal.net
Introductory Hypotheticals Hypothetical 1(a): A commercial property owner calls and says: The assessment office just reassessed my property to my recent sales price! Help me! Hypothetical 1(b): A commercial property owner calls and says: I just received notice that my property assessment was appealed by the local school district! What do I do? 2
Introductory Hypotheticals Hypothetical 2: A prudent real estate investor is considering purchasing a large commercial property, for a price higher than the assessment. She calls you, looking for advice as to: (i) what impact the sale might have on the assessment, and (ii) how to minimize the impact. What advice do you give? 3
Turning the Tables on Assessors and Taxing Jurisdictions Who Bring Recent Sale and Other Reverse Appeals Where s the Property? What state and county? What municipalities? What laws will apply? What are the practices of the assessor, other parties involved, and the factfinder on appeal? This will, in part, inform how to address the recent sale case. 4
Turning the Tables on Assessors and Taxing Jurisdictions Who Bring Recent Sale and Other Reverse Appeals The Pennsylvania Example - State statutes implemented at county level Base year assessment system Stated Ratio vs. Common Level Ratio Assessor cannot change assessment based upon recent sale However, a taxing jurisdiction (school district) can appeal after learning of a sale PA appeals: procedure and burden of proof Sales price considered but not controlling Reverse appeals not limited to recent sales! 5
Turning the Tables on Assessors and Taxing Jurisdictions Who Bring Recent Sale and Other Reverse Appeals The Recent Sale Appeal Defense: Examine the terms of the sale carefully. Was it arms length? What were motivations of the parties? Was it the sale of more than the real estate? Was accurate allocation of real and personal property performed? Who did it and what were their primary goals? 6
Turning the Tables on Assessors and Taxing Jurisdictions Who Bring Recent Sale and Other Reverse Appeals The Recent Sale Appeal Defense (cont.): Is the recorded sales price an of a multi-property sale? allocation Does property have a particularly high value for the buyer only? 7
Turning the Tables on Assessors and Taxing Jurisdictions Who Bring Recent Sale and Other Reverse Appeals The Recent Sale Appeal Defense (cont.): Was going concern value included? Was FFE included in the sale? 8
Turning the Tables on Assessors and Taxing Jurisdictions Who Bring Recent Sale and Other Reverse Appeals The Recent Sale Appeal Defense (cont.): Was entrepreneurial profit of the developer included in sales price? Is the recent sale date different than the relevant date of value? Is the recent sales price not uniform with comparable sales? 9
Turning the Tables on Assessors and Taxing Jurisdictions Who Bring Recent Sale and Other Reverse Appeals The Recent Sale Appeal Defense (cont.): Investigate the backstory: Talk to market participants regarding the sale. Talk to local appraisers regarding the sale specifically, and short-term market conditions that may have had impacted the sale. 10
Turning the Tables on Assessors and Taxing Jurisdictions Who Bring Recent Sale and Other Reverse Appeals Other issues to consider: Was a mortgage recorded? Is an appeal already pending that may be impacted by the sales price? 11
Turning the Tables on Assessors and Taxing Jurisdictions Who Bring Recent Sale and Other Reverse Appeals Valley Forge Towers Apartments N, LP, et al. v. Upper Merion Area Sch. Dist. and Keystone Realty Advisors, LLC, et al. AND NOW, this 26 th day of April, 2016, the Petition for Allowance of Appeal is GRANTED. The issue, as stated by Petitioners, is: [The School District] deliberately chose commercial properties, such as Petitioners, for selective assessment appeals, but did not appeal assessments of any single family home properties, although the latter are significantly underassessed. The Uniformity Clause of the Pennsylvania Constitution prohibits disuniformity in taxation. Is a school district s decision to appeal property assessment insulated from review because, inter alia, the school district has a statutory right to file appeals and can identify an economic reason for its appeals? 12
Turning the Tables on Assessors and Taxing Jurisdictions Who Bring Recent Sale and Other Reverse Appeals Some legislative relief? Pennsylvania General Assembly Regular Session 2017-2018 House Bill 1213 13
Statutory Green Light 1. Allow a taxpayer feeling discriminated against by assessed value of other property in the county to file a tax appeal 2. Allow taxing district which may feel discriminated against by assessed value of other property in the county or in the taxing district to file a tax appeal
Appeal Triggers Municipal Budget Caps Counterclaims 20 day rule Finding Value Assessment s Presumption of Correctness Appeal Counts Town by Town Welcome Stranger assessments single out properties acquired in a given tax year and leave undisturbed those in the same class that have not been sold
Appeal Triggers (Continued) Are Municipal appeals filed after the sale of the subject property Spot Assessments by another name? Does the filing of a tax appeal by a Municipality constitute an assessment?
Issues What are permissible reassessments? New improvements which increase value Addition of property formerly exempt Reassessment of apartments converted to condominiums Reassessment of all industrial and commercial properties based on a showing they were under assessed as a class
Constitutionality Uniformity Clause all real property assessed according to uniform rules and to the same standard of value Do Taxpayers enjoy favorable, discriminatory tax treatment and should they continue enjoying that favorable treatment unless every assessment which doesn t fall within the common level range of assessed to market value is also appealed by the Municipality?
Constitutionality (continued) Equal Protection Clause 14 th Amendment Protect individual from state action which selects the individual out for discriminatory treatment by imposing taxes not imposed on others of the same class. Ask: is the selection or classification of property for tax treatment arbitrary or capricious?
Constitutionality (continued) Reasonableness test Lack of uniformity within a taxing district Whether Assessing District has resisted efforts to carry out a revaluation Equivalence is selection of property for appeal the equivalence of assessment and taxation? Does a revised assessment as a result of a Municipal tax appeal provide Taxpayer with a rough equality of treatment?
Third Party Appeals Who has the burden of proof? Presumption of correctness applies to valuation Does Claimant have burden of proof? Standing to Appeal Public policy defense
Turning the Tables Go on Offense Summary Judgment Motions Depositions of Assessor, Taxing District Administrators and governmental officials PILOTs and long term exemption agreements Statutory amendments
Example #1: County Board Reverse Appeal
Example #2: Tax Court Reverse Appeal
Example #2: Tax Court Reverse Appeal (continued)
Example #2: Tax Court Reverse Appeal (continued)
Example #3: Tax Court Docketed Reverse Appeals
No Reverse Appeals, No Problem? : Dealing with Subject Sales in Jurisdictions Like NY That Do Not Have Reverse Appeal Statutes Reverse appeals are obviously a challenge nationwide The existence of a subject sale is easy fodder for taxing jurisdictions who have the reverse appeal option Nevertheless, assessors are relying on subject sales in many jurisdictions around the country, many times inappropriately and without recognition of the interests being transferred, or the various components of value, real, personal and intangible
Municipal Tactics With Subject Sales Sales rear their heads in these jurisdictions in several ways: outright selective or spot reassessments; opportunistic increases in jurisdictions that annually reassess - not wholesale adoption thinly disguised spot reassessments ; motion practice based on public filings not prepared with statutory definitions of valuation for property tax purposes in mind; simple defense in appeal negotiations New York is an example of a state where municipalities do not currently have a reverse appeal option but subject sale issues have become prevalent Westchester County has been a hotbed for this issue
Hampshire Country Club v. Assessor, Town of Mamaroneck Struggling golf course/country club sold by members to a private investor with a history of residential redevelopments and a specific plan to redevelop Golf course use continued while zoning pursued Value in use (golf course) v. contemplated future use (residential with golf course amenities) What was purchased? Paid for? What is the value standard in the jurisdiction? Did sale price reflect this standard?
Legal Value Standard in New York REAL PROPERTY TAX LAW SECTION 302 The taxable status of real property in cities and towns shall be determined annually according to its condition and ownership This is what is commonly called the actual use and condition mandate of assessment in New York REAL PROPERTY TAX LAW SECTION 102 Extensive and specific definition of what constitutes real property Whatever is not included, ie goodwill, personal property, business value & other intangibles, is not subject to property tax in NY Subject of extensive litigation in NY, especially what is personal and what is real affixed to the land question. See Review and Reduction of Real Property Assessments in New York, Lee & LeForestier, pps 68-76 (1988).
New York Assessment Standards & The Interplay Of Subject Sales The statutory use and condition mandate, along with statutory definition of what is taxable real property, must be interpreted alongside the traditional reliance by courts on the precedential value of a recent subject sale These concepts are directly not at odds as a matter of fact or law, but there is often a conflict The purchase price set in the course of an arm s length transaction of recent vintage, if not explained away as abnormal in any fashion, is evidence of the highest rank to determine the true value of the property at that time. Plaza Hotel Assoc. v. Wellington, 37 NY2d 273 (1975).
New York Assessment Standards & The Interplay Of Subject Sales So where are the conflicts? In determining what to pay for a piece of property, an investor is often considering much more than its current use and condition, and is often buying more than just the bricks and sticks that are properly subject to property tax under NY law. An investor may very well be considering a contemplated future use of the property. NY law does not allow assessors to consider future potentialities in valuing real property.. See Hampshire Recreation, LLC v Board of Assessors, 137 AD3d 1029 (2d Dep t 2016), Matter of Addis Co. v Srogi, 79 AD2d 856 (4 th Dep t 1980), Matter of Stillwell Equip. Corp. v. Assessors for Town of Greenburgh, 251 AD2d 672 (2d Dep t 1998). Also, many types of owner operators are buying not just the bricks and sticks, but intangibles and personal property. The most common examples are hotels, nursing homes, assisted living facilities, franchised restaurants, institutional self storage properties, recreational properties etc. A less obvious example could be regional shopping centers and mega malls.
The Problem Of Proof And Record Keeping State and local recording requirements have exacerbated the issue of the determinative impact of a subject sale on assessments in New York, especially in Westchester County immediately north of New York City and the Hudson Valley The state requires filing of a RP 5217 form, which requires a statement as to the arms length relationship of a transaction, and the dollar amount of personal property transferred; there is no request for intangible or business related value. Transactional real estate attorneys, in large part, do not consult with property tax counsel in preparing these forms. Assessors in NY attempt to use these declarations as admissions against interest in tax cases This strategy does not account for the differences in value assumptions created by the statutory mandate of actual use and condition v. investment value, or even acknowledge the concept of intangible or business value
Hampshire Hypothetical Revisited This thought process has been adopted by many assessors in NY Beginning with the case of Reckson Operating Partnership v. Assessor, 289 AD2d 248 (2 nd Dept 2001), there was an over decade long assumption that recorded sales prices governed value, and no litigated case, in Westchester County or the lower Hudson Valley, that determined a sale price had been explained away as not determinative of value in a property tax proceeding. This trend was largely true throughout upstate NY in the last decade. Highbridge Development BR LLC v. Assessor, 121 AD2d 1324 (3 rd Dept. 2014); Rite Aid v. Huseby, 130 AD3d 1518 (4 th Dept. 2015); TBS Realty Management LLC v. Hillburn, 26 Misc. 3d 1212, (Rockland County, Supreme Court (2009).
Hampshire Hypothetical Revisited These cases, and in turn assessors in negotiations, largely took the position that if a sale was recorded, there were no questions. There were exceptions: such as hotels, transactions part of bulk transactions. Assessors saw the obvious nature of the intangible value in the former, and the arbitrary nature of allocations in the later This trend continued with the lower court in the Hampshire case adopting the recorded purchase price, despite acknowledging that there was uncontroverted evidence that the purchaser of the golf course had future development potential in mind in agreeing to the purchase AND that the golf course, as a golf course, was worth a fraction of the purchase price.
Hampshire Hypothetical Revisited Ultimately, the appellate court recognized the conflict between this sale price and the requirement of RPTL Section 302 that a property be valued for property tax purposes in its current use and condition It firmly stated that evidence that future development potential had been a major consideration in setting a purchase price meant it could be determinative evidence of value for assessment purposes Recognizing this concept, and accepting this evidence, is of potentially great import in tax appeals in NY It is a concrete example of where sale price DOES NOT equal value for assessment purposes.
Questions? 38